Wednesday, December 27, 2017

Tax Records: What to Save and for How Long

Curious about how long you should hold on to your tax records after filing? A Dona Dizube over at House Logic details why holding on to those pesky documents can save you from future headaches in her article below.
Tax Filings

How Long to Keep Tax Records
By Dona Dizube
The federal tax law signed by President Donald Trump Dec. 22, 2017, may affect home ownership tax benefits described in this article. The new law goes into effect for the 2018 tax year and generally doesn’t affect tax filings for the 2017 tax year. In 2018, HouseLogic will be providing information on the tax provisions affecting home ownership. In the meantime, here’s a detailed summary of the changes.
Unless you’re living in the 123-room Spelling Manor, you probably don’t have space to store massive amounts of tax and insurance paperwork, warranties, and repair receipts related to your home.
But you’ll definitely want your paperwork at hand if you have to prove you deserved a tax deduction, file an insurance claim, or figure out if your busted oven is still under warranty.
To help you prioritize your paperwork, we’ve created a hand “How Long to Keep It” home records checklist.

First, a little background on IRS rules, which informed some of our charts:
  • The IRS says you should keep tax returns and the paperwork supporting them for at least three years after you file the return — the amount of time the IRS has to audit you. So that’s how long we advise in our charts.
  • Check with your state about state income tax, though. Some make you keep tax records a really long time: In Ohio, it’s 10 years.
  • The IRS can also ask for records up to six years after a filing if they suspect someone failed to report 25% or more of his gross income. And the agency never closes the door on an audit if it suspects fraud. Just sayin’.

HOME SALE RECORDS
DocumentHow Long to Keep It
Home sale closing documents, including closing statementAs long as you own the property + 3 years
Deed to the house
As long as you own the property
Builder’s warranty or service contract for new home Until the warranty period ends
Community/condo association covenants, codes, restrictions (CC&Rs)As long as you own the property
Receipts for capital improvementsAs long as you own the property + 3 years
Section 1031 (like-kind exchange) sale records for both your old and new properties, including HUD-1 settlement sheetAs long as you own the property + 3 years
Mortgage payoff statements (certificate of satisfaction or lien release)Forever, just in case a lender says, “Hey, you still owe us money.”
Why you need these docs: You use home sale closing documents, receipts for capital improvements, and like-kind exchange records to calculate and document your profit (gain) when you sell your home. Your deed and mortgage payoff statements prove you own your home and have paid off your mortgage, respectively. Your builder’s warranty or contract is important if you file a claim. And sooner or later you’ll need to check the CC&R rules in your condo or community association.

ANNUAL TAX DEDUCTIONS
DocumentHow Long to Keep It
Property tax payment (tax bill + canceled check or bank statement showing check was cashed)3 years after the due date of the return showing the deduction
Year-end mortgage statements3 years after the due date of the return showing the deduction
PMI payment (monthly bills + canceled check or bank statements showing check was cashed)3 years after the due date of the return showing the deduction
Residential energy tax credit* receipts3 years after the due date of the return on which the credit is claimed (including carryforwards**)
Why you need these docs: To document you’re eligible for a deduction or tax credit.
*Energy tax credits ($500 lifetime cap) for such things as energy-efficient windows, doors, heating and cooling systems, insulation, and more.
**Tax credits that you carry forward from one year to a future year, such as when you don’t have enough tax liability to offset the entire amount of the credit. (You can’t deduct more than you earn.) Only certain tax credits can be carried forward. Check with your tax pro about your particular circumstances.

INSURANCE AND WARRANTIES
DocumentHow Long to Keep It
Home repair receiptsUntil warranty expires
Inventory of household possessionsForever (Remember to make updates.)
Homeowners insurance policiesUntil you receive the next year’s policy
Service contracts and warrantiesAs long as you have the item being warrantied
Why you need these docs: To file a claim or see what your policy or warranty covers.

INVESTMENT (LANDLORD) REAL ESTATE DEDUCTIONS
DocumentHow Long to Keep It
Appraisal or valuation used to calculate depreciationAs long as you own the property + 3 years
Receipts for capital expenses, such as an addition or improvementsAs long as you own the property + 3 years
Receipts for repairs and other expenses3 years after the due date of the return showing the deduction
Landlord’s insurance payment receipt (canceled check or bank statement showing check was cashed)3 years after the due date showing the deduction
Landlord’s insurance policyUntil you receive the next year’s policy
Partnership or LLC agreements for real estate investmentsAs long as the partnership or LLC exists
Landlord insurance receipts (canceled check or bank statement showing check was cashed)3 years after you deduct the expense
Why you need these docs: For the most part, to prove your eligibility to deduct the expense. You’ll also need receipts for capital expenditures to calculate your gain or loss when you sell the property. Landlord’s insurance and partnership agreements are important references.

MISCELLANEOUS RECORDS
DocumentHow Long to Keep It
Wills and property trustsUntil updated
Date-of-death home value record for inherited home, and any rules for heirs’ use of homeAs long as you or spouse owns the home + 3 years
Original owners’ purchase documents (sales contract, deed) for home given to you as a giftAs long as you or spouse owns the home + 3 years
Divorce decree with home sale clauseAs long as you or spouse owns the home + 3 years
Employment records for live-in help (W-2s, W-4s, pay and benefits statements)4 years after you make (or owe) payroll tax payments
Why you need these docs: Most are needed to calculate capital gains when you sell. Employment records help prove deductions.

Organizing Your Home Records

Because paper, such as receipts, fades with time and takes up space, consider scanning and storing your documents on a flash drive, an external hard drive, or a cloud-based remote server. Even better, save your documents to at least two of these places.
Digital copies are OK with the IRS as long as they’re identical to the originals and contain all the accurate information that was in the original receipts. You must be able to produce a hard copy if the IRS asks for one.
Tip: Tax season and year’s end are good times to purge files and toss what you no longer need; that’s often when the spirit of organization moves us.
When you do finally toss out your home-related paperwork, use a shredder. Throwing away intact documents with personal financial information puts you at risk for identity theft.
This article was written by Dona Dizube on behalf of House Logic. The article provides general information about tax laws and consequences, but isn’t intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. 
If you're looking for further advice or information when it comes to tax documentation as a home owner, Three Rivers Association of Realtors is here to help. Contact us today!